Spectrum auction: Let’s see who gets hertz

Stephen Conroy
is throwing his big ‘‘waterfront property’’ auction party in mid-April. He’s already banked the $3 billion price he wants from selling the prize to paying guests. He doesn’t believe they may have other – cheaper – alternatives.

That level of confidence isn’t so surprising from a Communications Minister who recently boasted to a stunned New York audience that phone company executives in Australia would have to put red underpants on their heads if he ordered it. The result of the bluff is likely to leave either the host or the guests aggrieved. At the moment, it looks like the host.

It’s true that Telstra, Optus and Vodafone all want and need spectrum to improve the speed and coverage of their mobile networks. But neither Optus nor Vodafone necessarily want the luxury waterfront spectrum on offer in the more expensive 700 megahertz band – certainly not at the floor price mandated by the government as it bolsters its budget.

While this argument may seem arcane to consumers, it’s going to affect how much they pay for data downloads on their phones over the next few years. And whether there’s another hole in budget estimates. Prepare for finger pointing.

The government is selling the spectrum freed up by ending television analogue broadcasting by 2015. Conroy is planning on getting the great bulk of money from auctioning blocks of the low-frequency spectrum in the 700 MHz band – efficient and effective in transmitting signals within buildings. A simultaneous sale of the much cheaper high-frequency 2500 MHz spectrum is to make up the rest.

The reserve price for the 700 MHz band is effectively set at $1.36 per MHz per head of population, which phone companies complain is much higher than other governments are charging. Conroy argues that spectrum is a limited public asset of great value. The fact that all three big mobile players have paid their $25,000 auction registration fees will have encouraged his confidence in the red underpants theory.

Telstra, flush with cash and momentum, will certainly play its part for all sorts of reasons, including political relationships. It will bid for the lower-frequency spectrum, cementing its dominance in mobile network coverage. That’s even though chief executive
David Thodey
will be coy about intentions when he announces Telstra’s results tomorrow.

But any one telco is believed to be limited to purchasing up to a cap of 25 MHz of that band – estimated to be worth about $1.5 billion.

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The Communications Department initially assumed the rest of that spectrum band that is up for auction would involve a lucrative three-way price fight. This was promoted as ensuring “competitive tension’’.

Vodafone’s new chief executive, Bill Morrow, had other ideas. Soon after his arrival last year, he calculated his network didn’t need to pay for expensive lower-frequency spectrum, especially two years ahead of when it will be available. That was well before Conroy announced the price.

Morrow has plenty of problems to fix first, given the network’s lousy coverage, inadequate investment and poor customer service sent consumers fleeing in the past few years. But he is confident Vodafone has extensive spectrum, especially in the 1800 MHz band, to enable it to roll out its own high-speed 4G network when it chooses. That’s what Telstra and Optus have used for their 4G networks.

At most, Vodafone’s two big international shareholders might be interested in bidding for the much cheaper 2500 spectrum (at less than 3¢ a MHz per person), depending on their international priorities.

Kevin Russell, the new boss at Optus, is similarly sceptical about how much of the lower-band spectrum Optus needs. Certainly, Optus wants to catch up to Telstra in terms of coverage. But like Vodafone, Optus has been content to leave rural coverage to Telstra to dominate. The urban areas remain the commercial focus.

Russell has said that it’s possible to improve coverage there by building more towers, particularly if he shares the cost with Vodafone, with which Optus already has a joint venture. The greater the spectrum price set by Canberra, the more attractive the alternative. Even the appeal of an effective spectrum duopoly isn’t enough.

While the cheaper higher-band spectrum is not ideal for mobile coverage, it is still useful for increasing speed and broadband capacity for data. It’s that explosion in demand for ever greater amounts of data that is driving the real mobile growth. Voice, as Optus knows, is becoming ever less important.

Conroy is still not persuaded.

Canberra cites the high price AT&T was willing to pay Verizon in the United States for similar low-frequency spectrum recently. But Australia has always had much better mobile networks and coverage. AT&T was willing to pay up – but for a particular slice of spectrum valuable in filling specific gaps in its coverage in areas of high density.

Australian phone companies, in a different market, will make different choices about their underpants. Consumers will have to judge the results and the bill. So will the Communications Minister.